Fed: No rate changes on the horizon until 2015

If you're still several months away from being able
to afford a down payment on a house or replace your aging car, relax. You've
still got more than two years to take advantage of today's record-low interest
rates.

The Federal Reserve announced Wednesday that it will
continue to keep the federal funds rate target near zero -- and it plans to
leave the federal funds rate alone until at least mid-2015.

"Information received since the Federal Open Market Committee met in
September suggests that economic activity has continued to expand at a
moderate pace in recent months," said the Fed in a post-meeting statement. "Growth in employment has been slow, and
the unemployment rate remains elevated. Household spending has
advanced a bit more quickly, but growth in business fixed investment has
slowed. The housing sector has shown some further signs of
improvement, albeit from a depressed level."

As a result of the weak economic data, the Federal
Open Market Committee (FOMC) voted to leave the federal funds rate target --
which helps determine the interest rate at which banks trade balances held at
the Federal Reserve (thus influencing other interest rates) -- at 0 percent to
0.25 percent.

The record low rates are intended to help spur
borrowing and encourage businesses and consumers to spend. For example, the Fed
hopes that consumers will use today's historically low rates to refinance an existing
mortgage or buy a new house or car, despite the economic uncertainty that's
clouding their ability to plan ahead.

"Buying a home impacts consumer spending
drastically," explains David Nice, an associate economist with Mesirow
Financial. When you buy a new house "you have to furnish it. You might have to
put a new roof on it." Refinancing an existing mortgage can also help boost the
economy by reducing the amount you pay on your mortgage each month, giving
you more money to spend elsewhere, he says.

The low rates are also designed to help consumers dig
their way out of debt faster and pay down the high-interest loans that are
squeezing their ability to spend their income on something besides interest
payments, say experts.

For example, credit card holders, in particular, are
paying much less to carry a balance from month to month, thanks to the Fed's
efforts to keep the federal funds rate target near zero. That's because most credit
cards are tied to the prime rate, which is typically 3 percentage points
above the federal funds rate. When the federal funds rate target is revised by
the Fed, cardholders' APRs
usually move up or down as well.

Data shows the Fed's efforts have helped to some
extent, say experts. For example, "it does look like there is a pickup in
housing," says James Butkiewicz, a professor of economics at the University of
Delaware. "So those low rates in that sector are helping."

However, businesses aren't hiring at the rate the
economy needs to flourish, and are unlikely to do so until they have a
better idea of what type of environment they will be operating under. "What you
constantly hear about, which is very hard to measure, is the uncertainty," says
Butkiewicz.

Financial uncertainty is affecting businesses and
consumers alike these days, which is "why businesses are reluctant to make any
commitments," he says.

That's especially true right before the U.S.
presidential and congressional elections, which are set for Nov. 6. Fiscal
policy could change dramatically going forward, depending on the election's
outcome. Sharp decreases in government spending and tax increases for everyone could
also rock the economy in 2013 if U.S. leaders fail to come to an agreement in
time to stop the scheduled changes known colloquially as "the fiscal cliff."

Those uncertainties alone are enough to give people
pause about risking what they have on additional debt, say experts, even if
rates are historically low. "There's a lot of uncertainty on the fiscal side
that the Fed doesn't have much control over," says Mesirow Financial's David
Nice.

Things may improve after the election, once people
know what direction U.S. policy is likely to take going forward, says
Butkiewicz. "There will be a little more clarity," he says. "I think once the
election's over, people will say, now, at least we know where we're likely to
be headed for the next four years and then they can start making plans." That
may eventually lead to more confident borrowing.

It's too soon to tell, however, whether the
Fed's more aggressive policies, such as its recent decision to buy $40 billion worth of mortgage-backed securities each month, are working, say
experts. "The housing sector has picked up," says Butkiewicz. But, "it's
not going to react immediately to lower mortgage rates. People have to plan. I
know people right now who are reluctant to sell until after the first of the
year," he says, due to the upcoming holidays. "There's timing issues as
well. I think we need to give them a chance and longer time before we can
evaluate them," he says.

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